Bank valuations and earnings growth

In Sterne’s view, large cap banks continue to offer upside value as they trade at 10-11x forward earnings and about 1.4x TBV, and this is after taking into account the bounce in valuations due to the ‘taper.’

However, keeping in mind the recent expansion in forward earnings multiples, the analysts say, “Essentially the magnitude and uniformity of price performance are likely unsustainable through what should be a fundamentally challenging 2014. We would expect fundamentals and execution to outperform in 2014, or a return to a stock picker’s premium rather than the prevailing “buy the group” that has been so prevalent the last couple of years.”

About 10-12% earnings growth in 2015E is currently factored into the Sterne Agee Bank index, and this appears logical given the improvement in the economy and higher yields.

Take a chance on down-and-out Puerto Rico banks

Beaten down Puerto Rico banks such as Popular Inc (NASDAQ:BPOP), First Bancorp (NYSE:FBP) and OFG Bancorp (NYSE:OFG) offer scope for appreciation, too, given that the economy of the commonwealth appears to have stabilized, at least in the near term. The analysts draw comfort from the recent Economic Activity Index prints as well as improving employment data.